Ofgem to reduce distribution connection charges

Ofgem has opted to reduce connection charges for distribution network customers as part of its significant code review (SCR) of network access arrangements.

The regulator said the changes, which will come into effect for the beginning of the RIIO ED2 price controls in April 2023, will bring forward investment in low-carbon technologies such as electric vehicles and heat pumps and allow distribution network operators (DNOs) to reinforce their networks more strategically, ahead of customer need.

Customers connecting to distribution networks currently have to pay for all of the new assets required to extend the network to them. If existing shared assets need to be reinforced to accommodate the connection, they are also required to contribute towards the cost of that reinforcement, up to one voltage level above their point of connection.

Ofgem said these “shallow-ish” connection charging arrangements share the cost burden of reinforcement between connecting customers, which may receive a locational price signal encouraging them to connect where there is spare capacity on the network, and the wider customer base, which pays for any reinforcement from two voltage levels above the point of connection through Distribution Use of System (DUoS) charges.

However, the regulator said there are multiple issues with these arrangements:

• Ineffective price signals and ‘free rider’ effect –The current arrangements do not provide consistent or fair price signals for network reinforcement as they only exist for the specific customers whose connections trigger reinforcement. This incentivises prospective customers to “free-ride” by waiting to request a connection until reinforcement has already been triggered by another customer, unnecessarily delaying connections and hindering the uptake of low-carbon technologies.
• Incremental reinforcement – The current arrangements also encourage DNOs to take an incremental and reactive approach to reinforcement rather than investing in anticipation of wider network needs.
• Barrier to net zero –The current price signals may be too strong for some users and risk creating barriers to investment.
• Boundary distortions between transmission and distribution – Differences between connection charging arrangements at the transmission and distribution levels may be creating market distortions and/or impacting on competition between generators connecting to different networks.

Ofgem has therefore decided to introduce a “fully shallow” connection charging boundary for demand customers, which will no longer be required to contribute towards reinforcement of the wider network and will only have to pay for extension assets.

It has also decided to make the connection charging boundary shallower for generation customers, which will still be required to contribute towards network reinforcement, but only at the voltage level at which they connect.

Ofgem said these changes will reduce the price signals sent to customers about the cost of connecting in different locations and acknowledged that this could lead to inefficient investment decisions by some customers in some locations. However, the regulator said these efficiency losses are outweighed by the expected benefits in terms of encouraging the uptake of low-carbon technologies and strategic investment by DNOs.

To mitigate these concerns, Ofgem said there will be some exceptions to the new arrangements to protect other customers from excessive connection costs.

Ofgem said it will retain the high-cost cap – a threshold above which connecting generation customers are required to pay for any reinforcement costs in full. The cap is currently set at £200/kW.

It will also introduce a similar cap for demand customers set at £1,720/kVA. In line with the current arrangements for generation customers, the caps will both apply to reinforcement costs at the voltage level of the connection and the one above. Reinforcement costs below the cap will be paid according to the new charging arrangements.

The regulator said the introduction of a high-cost cap for demand should only affect a small number of expensive connections but will provide a “necessary backstop” to protect bill payers from excessive costs once demand customers’ liability to pay reinforcement costs has otherwise been removed.

Writing in a blog on its website, Ofgem’s head of electricity network access, systems and networks, Patrick Cassels, said: “The changes we are announcing today will mean more of the costs of these new connections will be shared in a fair and proportionate way amongst all network users, making the likes of electric vehicle charging points and heat pumps, more accessible and affordable for individual customers.”

Flexible connections

Ofgem has additionally decided to introduce a new requirement on DNOs to offer larger network users standardised non-firm connections with clear curtailment limits and end dates.

These flexible connections allow users to connect more quickly and cheaply in constrained areas of the network prior to reinforcement taking place. In exchange, they are subject to curtailment during periods of high congestion.

However, Ofgem noted: “At present, there is no commonly defined limit on the extent to which their network access can be curtailed. Arrangements can be poorly-defined, with no standard definition of curtailment, and how they work in practice can vary across DNOs.”

The regulator said DNOs will be required to offer non-firm connections to larger users where there is a need for reinforcement or curtailment to manage local network constraints.

These offers must contain curtailment limits defined in terms of the numbers of hours or percentage of time that users agree to be curtailed. Ofgem said DNOs should develop a standardised approach to setting these limits.

Any curtailment above these levels should be procured from flexibility markets. Ofgem has decided to introduce an “exceeded curtailment price” – a cap on the price of flexibility that DNOs are required to procure if they need to exceed the limits.

This will also be the price connecting customers receive as compensation if DNOs curtail their connections above the limits. The regulator emphasised that this compensation should not be used as a default remedy and DNOs must demonstrate that they have taken “best endeavours” to avoid such situations.

Furthermore, DNOs will be required to agree explicit end dates for non-firm connections in advance. Ofgem said these end dates will ensure DNOs invest in network capacity: “An open-ended arrangement provides no incentive on network operators to resolve the constraint and progress with reinforcement or procure flexibility in a timely manner.”

The regulator said there will be an exception for customers that do not request firm connections or are unwilling to accept the costs of firming them up.

Ofgem has issued a direction to implement the changes to connection charging and access arrangements through modifications to the Distribution Connection and Use of System Agreement.

Paul McGimpsey, director of regulation at the Energy Networks Association, said: “As the energy networks become even more decentralised, digitalised and decarbonised to help the UK meet its net zero targets, Ofgem’s plans will help customers to connect low-carbon technologies to the grid quicker and more efficiently.

“We will be supporting Ofgem to ensure that the resulting changes to the energy codes will be implemented before RIIO-ED2 begins next year.”

The network access SCR originally had a wider scope when it was launched back in December 2018, also covering forward-looking network charging at both the distribution and transmission levels.

However, Ofgem has since chosen to spin-off its work on forward-looking DUoS charges into a separate dedicated SCR. It has also decided to look at forward-looking Transmission Network Use of System (TNUoS) charges separately, instructing National Grid Electricity System Operator to lead one or more taskforces to examine and address the root causes of their volatility and unpredictability. The regulator said forward-looking TNUoS charges may also eventually be subject to a dedicated SCR.